AXIS’ fee income from third-party capital rises, as cessions increase again

Bermudian insurance and reinsurance specialist AXIS Capital Holdings Limited has started to earn a significant amount of fee income from its activities with third-party investors, as its fees earned from the strategic capital partners relationships rise significantly year-on-year and cessions to investors continue to increase.

AXIS Capital’s activities involving third-party investors, some of whom are ILS and other investment managers, is beginning to drive meaningful amounts of income and becoming an increasingly important piece of the firm’s overall operations.

Cessions to these third-party capital partners have steadily risen in recent quarters, with the firm electing to pass on more of its premiums underwritten to institutional and ILS investors over its Harrington Re vehicle, where cessions have largely stabilised or shrunk slightly in recent periods.

In the third-quarter of 2018 AXIS ceded roughly $136.5 million of premiums to its strategic capital partners, up from $108.7 million in the prior year period.

The Harrington Re cessions again shrank a little during the quarter, coming in at $49 million for Q3 2018, compared to $55.9m in Q3 2017.

But cessions to the firms other strategic capital partners, which is where investors on the ILS side of the industry sit, rose strongly to $87.4 million during the quarter, up from $52.8 million in the previous year.

The extent of AXIS’ work with third-party ILS type investors was made clear recently, when we documented that mutual fund investor Stone Ridge Asset Managment had roughly $657 million of investments in various segregated accounts of the AXIS Ventures Re collateralized reinsurance vehicle and another almost $26 million invested into AXIS’ Northshore catastrophe bonds.

For AXIS this access to efficient capital is being put to good use, not just as a source of retrocessional capital that can help it manage its exposures and PML’s, but also as a source of capital that can be used for growth and expansion into areas of the business where its own balance-sheet may not be as suitable, as well as a driver of increasing amounts of fee income.

For the third-quarter of 2018 AXIS has reported an impressive $18.3 million of fee income from its activities underwriting for strategic capital partners in Harrington Re and the other third-party capital activities, more than treble the $5.5 million reported in the loss hit Q3 of 2017.

For the year-to-date AXIS’ third-party capital fee income growth is even more impressive, with almost $42.8 million earned in the first nine months of 2018, compared to $28.3 million in the prior year.

The fee income should keep on building as well, as AXIS has now ceded more than twice as much in the way of premiums to its third-party capital investors in 2018 as it did last year.

Cessions to the other strategic capital partners, so where the ILS business sits, are almost $540 million for the first nine months of 2018, over double the $283 million ceded in the same period of 2017.

Interestingly, while cessions to third-party reinsurance capital investors have increased so dramatically, the cessions to Harrington Re, AXIS’ total-return style reinsurance vehicle, have decreased slightly to $163 million in 2018, compared to $179 million last year.

It’s possible that AXIS has found that the use of third-party investor capital is even more efficient for the firm than its Harrington Re structure, which could suggest we see the use of ILS capital continuing to increase, while Harrington Re remains flatter.

Of course this could also be a factor of what type of underwriting business AXIS is choosing to cede, with longer-tailed lines perhaps more suitable for the Harrington Re structure, while ILS and institutional investor appetite can help the firm grow in property and catastrophe business.

AXIS’ work with third-party reinsurance capital is through its total-return reinsurance joint-venture Harrington Re, and its AXIS Re Ventures unit.

It is the Ventures unit business where its insurance-linked securities (ILS) fund management type activities take place, largely in the form of private collateralized quota shares and ILS arrangements with investors or funds.

Here, AXIS is able to capitalise on investor demand for access to reinsurance business as well as the availability of efficient capital, helping it to significantly grow this part of its business where it can be paid for underwriting and managing third-party capital, but without bearing all of the risk.

AXIS’ work with its strategic capital partners is a clear demonstration of the evolving business model of major re/insurers, who are now looking to earn income for underwriting on behalf of investors and leveraging the efficient third-party capital to augment their own balance-sheet capacity.

This evolution of the reinsurance business model continues to become more prevalent, as sharing underwritten premiums in return for the fees and profit shares that can be earned, while also benefiting from an augmented capacity pool to deploy at renewal time, becomes the norm and the amounts of third-party capital sitting alongside reinsurers traditional balance-sheets continues to grow.